New figures for growth in the second quarter of the year showed that America's GDP expanded far more than first estimated. Although there was still no sign of inflation, the financial markets saw the figures increasing pressure on the Federal Reserve to raise interest rates later this year.
The FTSE 100 index ended nearly 62 points lower at 4,845.4 yesterday. On Wall Street, falls in technology stocks such as IBM and Altera took the Dow Jones index down more than 123 points to 7,663.77 by mid-morning, although it later recovered.
The jitters in the US and Europe followed earlier plunges in Asian stock markets.
According to new figures, US gross domestic product increased at an annual rate of 3.6 per cent in the second quarter of this year, much higher than the initial estimate of 2.2 per cent.
Higher exports and faster stockbuilding accounted for most of the revision, but the estimates for the rise in consumer spending were upgraded too.
The new figures mean that the US economy has grown at an average rate of 4.3 per cent since late last year - well above what economists would see as the trigger-point for eventual increases in inflation.
But the GDP deflator, the widest measure of prices, showed inflation at only 1.5 per cent in the year to June.
Brian Fabbri, chief economist at Paribas in New York, said: "There is strong growth, great profitability and no inflation. What more could anybody want?"
But he warned: "The Fed must be aware that the economy is simply booming."
Many analysts expect US interest rates to rise later this year in order to return growth to a sustainable pace, with November seen as the most likely month for the move. Although stockbuilding is likely to fall back significantly in the current quarter, underlying demand, powered by consumer spending, is expected to pick up still further.
Christopher Low, of HSBC Markets in New York, said: "There is ample reason to worry about the momentum of growth."
Bijhal Shah, a strategist at Merrill Lynch, said: "The US stock market is very highly valued and can only sustain this if profits continue to grow rapidly. But nobody knows exactly when the Fed will be forced to react by raising interest rates."
He said that when Wall Street finally saw a significant drop in share prices this could launch a downward spiral as the huge gains in the stock market had made a big contribution to the buoyancy of spending and the US economy. The spread of stock options as a part of pay packages meant high share prices had played a big part in bolstering consumer spending.
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